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Ray Dalio Sees More Pain Ahead in This Debt Cycle


Ray Dalio founded Bridgewater Associates in his Manhattan apartment in 1975 and grew it into a hedge fund colossus—with about $150 billion in assets—through astute analysis of macroeconomic trends. Along the way, he developed a set of principles, later articulated in talks, tweets, and books, that helped shape the firm’s culture of “radical transparency” and made Bridgewater an “idea meritocracy.” Dalio recently handed off management of the Westport, Conn.–based firm to the next generation of leaders, but will remain a member of its operating board, an investor, and a mentor to senior executives.

Dalio, 73, is stepping down at a time when Bridgewater’s flagship Pure Alpha fund is riding high—it gained more than 22% this year through Oct. 31—but the world is feeling low. After years of loose monetary and fiscal policies and debt-fueled growth, many nations are grappling with rampant inflation, and central bankers are raising interest rates to cool price gains. Higher rates, in turn, have clobbered stock and bond markets, and threaten to tip major economies into recession next year. Meanwhile, in the U.S., the population is highly polarized, while external conflicts among superpowers threaten to put an end to decades of relative peace.

Dalio explored these trends in his latest book, Principles for Dealing With a Changing World Order, and laid out their implications in a recent interview with Barron’s. His views are his own and might not reflect those of Bridgewater, he notes. An edited version of the conversation follows.

Barron’s: You have studied patterns in history to help you understand the present and prepare for the future. What does history tell you about the present moment and what might happen in the years ahead?

Ray Dalio: There are five big forces driving what is happening now in ways that haven’t happened in our lifetime but happened many times in history. One is the big debt levels and debt increases that central banks have been supporting by buying a lot of debt with money they are printing.

A second is large internal conflicts within countries—the largest since 1930-45. They are due to the largest wealth and values differences since that period. The conflicts most threatening to our system are those between populists of the right and the left. This conflict will have big implications for taxes, how the wealth pie is divided, and how well our system works.

A third force is conflicts among countries as the world order shifts from being unipolar to bipolar. Throughout history, when the most powerful countries have roughly comparable power, typically there are international conflicts over wealth, power, and ideologies. We’re seeing that now between Russia and NATO, China and the U.S., and other countries. That is changing the world order in important ways that we haven’t seen since 1930-45. It is leading to governments prioritizing self-sufficiency and military spending over producing efficiently, which is causing supply-chain problems that are lifting inflation. It also raises the risks of military war.

Ray Dalio, founder of Bridgewater Associates and author of the new book “Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail,” discusses how social division and polarization could lead to a major domestic conflict.

When all three forces are in their difficult stages—when financial and economic problems, big conflicts within counties, and big conflicts among countries coincide—they create difficult periods that typically produce major changes in the world order.

You mentioned five forces. What are the other two?

They are severe acts of nature such as droughts, floods, and pandemics, and on the bright side, man-made innovations and technologies. I didn’t realize until I studied history that droughts, floods, and pandemics have toppled more civilizations and killed more people than the first three forces combined.

On the other hand, man’s ability to adapt and invent new technologies is the greatest force, and is now better than ever, because computers are helping us think better, and the development of the venture-capital markets is providing inventive entrepreneurs with the resources to try out their ideas and, if they pass muster, bring them to scale.

Based on your study of history and cycles, which parts of the world look attractive from an investment perspective?

While one needs to invest in the reserve-currency countries with large market caps that still have the most to offer, including the U.S., Europe, and Japan, there are emerging countries with strong finances and internal order that are likely to be able to be neutral in the great-powers conflicts and have exciting investment opportunities. They include Singapore as a hub to invest in the Asean [Association of Southeast Asian Nations] region, in countries such as Indonesia and Vietnam. India will have the highest growth rate of all countries over the next 10 years, and there are opportunities in parts of the Middle East and North Africa, although capital markets in these places are still early in their development.

It is also important to have some money invested in China, which is very attractively priced. And I am attracted to export businesses in northern Mexico because their labor costs are now low relative to China’s, and they are benefiting from China being perceived as a dangerous place to produce in and from which to export to the U.S.

Many people consider China uninvestible because of authoritarian rule and government meddling in its markets. Do current prices discount the risks?

China is going through some significant changes that most people have exaggeratedly bad interpretations of, so there are some great values there. We’re probably close to being past most of the selling. In any case, one should invest there because it’s the second-biggest economy in the world, the main competitor to the U.S. in most ways, and a good diversifier in a world in which such competitions exist. Of course, if these competitions turn into greater economic or military wars, it won’t be good for either country, and neutral countries with strong finances and minimal internal conflicts will do best.

What are the implications of today’s high debt levels and money printing?

When interest rates hit zero percent and there is a deflationary debt crisis, central banks have to print money and buy or guarantee debt. They did that most recently in 2020, and before that, in 2008 and 1933. That leads to reflation, which inevitably becomes excessive, which leads central bankers to tighten monetary policy—which leads to the opposite happening.

The central bank has to make interest rates high enough to reward the creditors to hold the debt assets without making them so high that they unacceptably damage the debtors. When that balancing act is difficult because both debt assets and debt liabilities are very large, central banks chart a middle course between too-high inflation and a too-weak economy, which leads to stagflation. That’s what is happening now.

Will the Federal Reserve continue to raise rates aggressively, or relent at some point and “pivot”?

I expect they will slow the pace and come to a pause. The right interest rate now is probably in the vicinity of 4.5% to 5%. There is a lagged effect from tighter credit. It is beginning to affect the economy, the housing market, and companies that borrowed. Many households aren’t having problems yet. That probably won’t happen for another nine months.

How bad will things get?

Credit is becoming tight because there is a supply/demand imbalance. More specifically, the federal government is running a budget deficit of about 5% of gross domestic product, which means it has to sell bonds equal to 5% of GDP. At the same time, the Fed is shrinking its balance sheet by selling or letting run off its current bondholdings from prior quantitative-easing programs (equal to about another 5% of GDP).

The world has positioned itself on free money, so it will go through a withdrawal shock.


— Ray Dalio

There aren’t enough buyers for these debt assets at current prices, which will require prices to fall and yields to rise. A contraction in private credit [will occur] from this crowding-out by public borrowing, as well as the Fed’s short-term interest-rate hikes. In combination, these will lead to the private sector facing far higher borrowing costs.

There is no end to the spending needs. Climate-change initiatives and remediations are estimated to cost $9 trillion a year, and rebuilding Ukraine will cost an estimated $700 billion to $1 trillion. We also have to rebuild our infrastructure, spend more on defense, improve education, and so on. Countries don’t ask themselves how much can they can afford to spend because they can borrow and print money. What is the cost of doing that, or is there no cost? The cost comes in the form of devalued money and devalued debt assets. We should expect more of that.

In that case, will the Fed’s efforts to shrink the money supply be futile?

The Fed and the government are attempting to get rid of the debt they have accumulated, but they never get rid of very much. Central banks are now in the tightening part of the cycle because they overdid easing, so they are raising rates and selling off some of the debt that they bought. That will cause big problems because the world has positioned itself on free money, so it will go through a withdrawal shock.

The Fed’s selling of debt assets will be accompanied by other sellers of debt, creating too many sellers of debt assets relative to buyers. To make the supply and demand balance, private credit will have to contract, which will weaken demand and the economy. Then, we will go to the next phase of the cycle. When the next big downturn occurs, and the economic pain is greater than the inflation pain, you will see the Fed and other central banks continue money-printing to monetize debt. Then, real rates will go down again, money will become cheaper and more plentiful, and inflation-hedge assets and new innovation/technology-company equities will be most attractive.

How should investors be positioned for the conditions you foresee?

There is a saying in the markets that he who lives by the crystal ball is destined to eat ground glass. I could be wrong. That said, first make sure you look at investment returns net of inflation, because the way you are most likely to be taxed is through the decreased value of your money. Don’t assume that cash is a safe investment; if the inflation rate is 6% and your interest rate is 4%, that is a 2% loss. And worry about just being long stocks and other assets that go up in good times. The world is leveraged long. In other words, most investors are long assets with borrowed money supporting those positions, which is a formula for a shakeout as prices go down and the debtors holding these assets get squeezed. After they get squeezed and have to sell, or when the Fed starts printing money and monetizing debt again, that will be the time to buy.

Thanks, Ray.

Write to Lauren R. Rublin at lauren.rublin@dowjones.com



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